Cash flow is a far more critical issue for than for the "lifetime employee," since the lifetime employee's regular paycheck guarantees a predictable level of cash flow. Needs to plan for the erratic ebb and flow of cash that result from not always being able to predict when one will have assignments or how much cash each assignment will generate in any given period. Must therefore distinguish between cash and costs in analyzing his or her financial position. Cost is what you ultimately pay to acquire goods and services, while cash flow is what you pay in real dollars.
In balancing cash and cost, needs to understand the use of credit, and although he or she has undoubtedly used credit before, the principals at work in using credit for one's business are somewhat different than those for personal use. Business credit revolves around "granting" credit to your clients while at the same time "getting" credit from your vendors. The trick is in learning how to balance giving and getting credit in order to maximize your cash flow. Below are some of the more typical ways that you can achieve this balance.
Handling Receivables
When dealing with customers or clients, you should always attempt to get cash payments as close to the actual delivery date as possible. To facilitate this, be sure to:
- Always bill the customer or client promptly. Most clients have a time lag before processing invoices from vendors, so the sooner that you get the invoice to the client, the sooner they will get it processed and paid.
- Establish payment arrangements with the client so cash flow will be predictable. This often takes the form of a retainer arrangement where you and the client know that you are going to do a certain amount of work over a period of time and you then receive regular periodic payments. This cuts down the work for both of you.
- Always receive advance payments for money you will have to lay out on behalf of the client. This is very common in the advertising field or where you are rendering a service as an agent for a client. You should establish the fact that the client will make these advances as a matter of course.
- Grant reasonable cash discounts for prompt payment. If the industry has standard terms for payment, you might be able to vary those standards by granting specific cash discounts for payments made early. For example, you may offer a 3 percent discount in exchange for ten day net payment terms.
- Follow up on late receivables immediately. Even though clients may agree to the payment terms, there are always some who are consistently late. Some companies just expect to be dunned, so don't be bashful about doing so, since they are, in effect, using you as a source of credit.
Portable executives should try to obtain the largest credit lines they can, preferably while they are still employed full time, so that those lines can be tapped in a cash flow crunch. Credit cards, of course, carry one obvious disadvantage: at an 11 to 21 percent interest rate, this is probably the most expensive way to cover a cash flow problem unless you use them only for a thirty day float and pay the balances in full.
Leasing Versus Buying
In many instances, leasing offers a way to conserve cash. Cars, computers, and other big ticket items can be leased, saving you from having to lay out cash up front. The decision about whether to lease or buy, however, should be weighed very carefully, as there are instances when the cost of leasing outweighs the benefits. An accountant can help you figure out what the true cost of leasing, as opposed to buying, actually is.
Dealing with Suppliers
Just as your clients will attempt to use you as a credit granting agency, so, too, should you negotiate with vendors and suppliers for the best possible terms. These arrangements will help to offset cash flow problems created while you wait for receivables to be paid. As you will quickly learn, there are very sophisticated credit monitoring agencies that furnish your suppliers with reports on your payment patterns. It is therefore important to maintain a consistent record of payments to be able to use credit.
When acquiring goods and services for inventory, one can often work out deals with vendors and suppliers to deliver the goods "just in time," so that the need to carry inventory is eliminated. Large companies are doing this more and more, and portable executives who buy inventory should use this strategy where appropriate.
Fine tuning
Finally, while your pricing strategy should remain fairly consistent and your co and fast control measures should be well thought out in advance, both areas will need continual fine tuning to achieve your economic goals over a lifetime. While the need to continually strike and re strike these balances to maximize profit margins may initially involve a great deal of anxiety, like all of the other risks you take, the rewards that come with controlling these aspects often outweigh the experience of working as an employee of a large organization.
